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Exit from FATF ‘grey list’

Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori

The FATF welcomes Pakistan’s significant progress in improving its AML/CFT regime. Pakistan has strengthened the effectiveness of its AML/CFT regime and addressed technical deficiencies to meet the commitments of its action plans regarding strategic deficiencies that the FATF identified in June 2018 and June 2021, the latter of which was completed in advance of the deadlines, encompassing 34 action items in total. Pakistan is therefore no longer subject to the FATF’s increased monitoring process. Pakistan will continue to work with APG to further improve its AML/CFT system”— Outcome FATF Plenary, 20-21 October 2022

Pakistan was designated in 2018 as a jurisdiction subject to increased monitoring, commonly known as the grey list, by the Financial Action Taskforce (FATF), a global money laundering and terrorist financing watchdog.  The FATF selects a jurisdiction for review if it does not participate in a FATF-styled regional body (FSRB), like Asia Pacific Group (APG) or does not allow mutual evaluation results to be published promptly or is nominated by a FATF or an FSRB member. The nomination to list any jurisdiction under the watchlist is based on money laundering, terrorist financing, proliferation financing risks, or threats coming to the attention of delegations. Another criterion includes that a jurisdiction has achieved poor results on its mutual evaluation, specifically:

  • it has 20 or more Non-Compliant (NC) or Partially Compliant (PC) ratings for technical compliance; or
  • it is rated NC/PC on 3 or more of the following Recommendations: 3, 5, 6, 10, 11, and 20; or
  • it has a low or moderate level of effectiveness for 9 or more of the 11 Immediate Outcomes (IOs), with a minimum of two lows: or
  • it has a low level of effectiveness for 6 or more of the 11 IOs.

However, Pakistan was placed on the list of jurisdictions under increased monitoring because of the motion moved by the United States of America and the United Kingdom, later supported by France and Germany as co-sponsors. Pakistan, facing the allegation of terrorist financing, was considered weak in implementing the relevant regulations.

Therefore, in 2016, then Prime Minister of Pakistan, Mian Muhammad Nawaz Sharif, apprised the military and other intelligence agencies of the severe consequences insisting on concluding various investigations concerning terrorism involving international interests, stating that non-compliance with the demands of global watchdog could lead to us to international isolation. Despite this clear warning, Pakistan could not improve its compliance level as per the requirements of international standards. Finally, in February 2018, the United States officially moved a motion against Pakistan to place its name on the terrorist financing watchlist, and subsequently, we stood officially included in it in June 2018.

We made a high-level political commitment to work with the FATF and APG to strengthen our anti-money laundering and combatting the financing of terrorism (AML/CFT) regime and to address strategic counter-terrorist-financing-related deficiencies. FATF assigned Pakistan an action plan with 27 items for compliance.

Pakistan was given reasonable time to address the action plan, but it missed the deadline twice. The Asia Pacific Mutual Evaluation Report about Pakistan, released in 2019, highlighted serious concerns about our AML-CFT framework. It also showed distrust on the performance and understanding of our law enforcement agencies (LEAs) and judiciary, as well as our financial institutions, about AML-CFT laws and regulations.  The watchdog further slapped us with an additional 7-point action plan to complete by the end of June 2022. Pakistan took almost 6 years—two years from the initial warning by the watchdog as well as the premier in 2016 duly communicated to LEA’s and over four years since officially placed on the grey list to address FATF concerns.

The action plan assigned to us did not require more than 6 months to one year to streamline our AML-CFT framework. Unfortunately, despite spending over four years, we are not yet fully compliant with FATF recommendations. The day the FATF’s President announced our exit from the grey list, we had yet not fully complied with 31 recommendations—29 largely compliant and 2 partially compliant. We are so far fully compliant with only nine out of forty FATF recommendations.

On the other hand, the effectiveness rating of our compliance level remains a challenge—it is basically reflective of the extent to which a country’s measures are effective to stop the penetration of the illicit flow of funds in the financial system. In this regard, the FATF assessment is based on 11 IOs, each representing key areas that an effective AML/CFT system should achieve. On this account, our score is not very optimistic as 10 out of 11 i.e., 90% are identified as having a low level of effectiveness as per the consolidated assessment rating issued on October 5, 2022.  It shows that the watchdog has noted visible shortcomings on the technical side of our compliance. Therefore, our rating on effectiveness could not improve even after being a member of the APG since 2000.

India opted for APG membership in 1998 and drafted ‘The Indian Prevention of Money Laundering Act’ [“the Act”] in 2002. It created Financial Intelligence Unit (FIU) in 2004 and implemented the Act in 2005. It formally applied for membership in FATF and became an observer in 2006. After detailed scrutiny of its affairs, FATF finally granted full-fledged membership on June 25, 2010.

Our seriousness in dealing with matters related to national and economic interests is evident from the fact that even after a lapse of 22 years, we have failed to introduce a comprehensive AML/CFT framework to satisfy the international community. Our neighbor and arch-rival became a full member of the watchdog in just 12 years after opting for membership in APG.  During these twenty-two years, we got warnings multiple times, including termination of membership for not introducing anti-money laundering laws/rules/regulations.

We remained on the grey list as FATF kept raising concerns about our policy, coordination, and cooperation-related matters important to mitigate the risks of AML/CFT to achieve a high level of effectiveness. Similarly, while coordinating with international bodies, a robust mechanism must exist to disseminate appropriate financial intelligence, information, and evidence. We currently have only a moderate level of effectiveness for IO2 whereas all others are at a low level.

The IOs 3, 4, and 5 are designed to ensure that proceeds of crime and funds in support of terrorism are prevented from entering the financial and other sectors and that any such suspicion is timely detected and reported. For ensuring better results, the supervisory bodies in Pakistan must effectively monitor and regulate financial institutions (FIs) and Designated Non-Financial businesses & Professions (DNFBPs) so that they follow AML/CFT requirements. The FIs and DNFBPs should also deploy adequate preventive measures proportionate to their risk profile and must report suspicious transactions to assigned regulators within time.

Apart from improving the effectiveness of our compliance, the recent plenary of FATF concluded to working closely with International Criminal Police Organization (Interpol), Egmont Group, United Nations Office on Drugs and Crimes (UNODC), World Bank and other partners to promote effective assets recovery. Pakistan should also revisit its foreign assets recovery regulations and framework as per the international best practices to ensure that any request for Mutual Legal Assistance (MLA) issued to seek cooperation must be corroborated with facts and accompanied by evidence. The government must hire services of professionals for the training of law enforcement agencies. Pakistan also needs to improve its compliance with FATF recommendations 24 to identify beneficial ownership to prevent the misuse of corporate structure or legal persons, trusts, and other such arrangements for money laundering.

We should proactively detect and counter threats associated with perils like money laundering and terror financing. Criminal elements involved in the process should be penalised and deprived of illicit proceeds. The role of established financial intelligence units and other supporting bodies is critical as it can ensure that relevant information is appropriately shared and used by the competent authorities while investigating cases of money laundering and terrorist financing. The only way forward is to introduce a robust system that will not only help in detecting and mitigating potential threats, but will also help in achieving a higher conviction rate to restrict crimes designated by the United Nations Security Council Resolutions (UNSCRs), the financing of proliferation of weapons of mass destruction (WMD), using our financial systems.

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Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE).

Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions         

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